Govt must make hard choices in new budget

Govt must make hard choices in new budget

By Rikza Abdullah

President Soeharto is scheduled to present the government's
draft budget to the House of Representatives on Tuesday. Saddled
with its worst economic crisis in 30 years, the government
confronts an unenviable choice between cutting spending in
compliance with the prescription of the International Monetary
Fund, or boosting it to stimulate growth. The Jakarta Post
interviewed several economists about their predictions for the
budget, and what they believe would be the best remedy for the
ailing economy.

JAKARTA (JP): There are two possibilities when President
Soeharto unveils the draft government budget for the fiscal year
starting April 1. Spending could go up, as it has always done, or
there could be the precedent of it being reduced.

Many economists fear the latter will be the case, with all its
attendant severe consequences for the economy, but they still
hold hope the government will have the will to bolster spending.

A term in the IMF's US$40 billion rescue package loan for
Indonesia in October was that the government strive to produce a
budget surplus equivalent to 1 percent of the country's gross
domestic product.

With the GDP estimated at Rp 474.63 trillion in March 1997,
this translates into the government endeavoring to earn Rp 4.7
trillion more than it intends to spend during the year.

It can achieve this by bolstering income, a difficult if not
impossible course under the current economic downturn, or cut
back on spending, an unpopular but more likely measure. This
would be a departure from the long-held principle of a balanced
budget.

The implication is that the government will take more money
out of the economy than it is putting in. It will be a
contractive budget, one that will affect aggregate demand in the
economy already battered by the economic crisis.

Sri Mulyani, an economist at the University of Indonesia, said
the IMF term was intended to take off the pressure on Indonesia's
balance of payments.

"But we hope the government would also try to use the budget
as an instrument to contain the domestic effects of the monetary
crisis -- high inflation and unemployment -- and to stimulate
economic activities," Mulyani said.

"A surplus budget will contract the economy. The government
should renegotiate with the IMF on the surplus requirement."

The government's budget has never been a major instrument to
stimulate growth. Instead, people were looking at economic reform
policies, including deregulation and debureaucratization, as
stimulants.

Economists agree a contractive budget is bound to have severe
repercussions on the economy.

Didi J. Rachbini, director of the Institute for Development of
Economics and Finance, said the government should not feel
obliged to meet the IMF's requirements on the budget surplus in
view of the stagnant economy.

Economist Kwik Kian Gie said the budget clause would lower
people's purchasing power because the government would likely try
to collect as much revenue as possible through taxation, but
limit its spending for development activities.

Mari Pangestu of the Centre for Strategic and International
Studies said the government would effectively cease to play any
role in stimulating the economic growth rate if it complied
with the IMF's term.

The monetary crisis has already lowered economic growth
projections from an optimistic 7 percent to 5 percent at best.
Economists now predict the growth rate will plunge to between 1
percent and 3 percent this year. The economy needs to grow by at
least 5 percent annually simply to absorb the two million young
people who join the labor market each year.

The major political forces have also called on the government
to raise its spending in 1998/99 despite the IMF term. Golkar has
proposed a balanced budget of Rp 110.9 trillion, the Armed Forces
called for spending totaling Rp 113.35 trillion and the United
Development Party for spending of Rp 115.7 trillion.

Analysts believe the government is looking for ways to bolster
spending since 1998 is regarded as a "political year", with the
presidential election in March.

Mari, Kwik and Mulyani believed the government's ability to
raise spending in 1998/1999 would be severely limited even if it
wanted to follow that course.

There are already predictions the government will not reach
its budget targets in the current fiscal year. The current budget
is slated to balance between spending and revenues at Rp 101.08
trillion ($18.5 billion at the Jan. 2 exchange rate).

"If the government, for political reasons, wants to raise its
spending, it will not exceed Rp 110 trillion," Mulyani says.

She pointed out that revenues from non-oil taxes -- the major
supplier of total domestic revenue -- will likely fall to Rp 50
trillion from the Rp 73.1 trillion originally targeted this year
due to falling profitability of companies.

Revenues from the oil and gas sectors will come to the
government's salvation as they are priced in dollars.

She noted Indonesia's OPEC oil quota had been raised from 1.33
million barrels per day (bpd) to 1.45 million bpd beginning in
the first half of 1998, and that the rupiah earnings from this
sector would be bolstered following the sharp depreciation of the
rupiah against the dollar.

Minister of Mines and Energy Ida Bagus Sudjana has already
indicated that the government will calculate the 1998/1999 budget
on the basis of an average oil price of $17 a barrel compared to
$16.50 this fiscal year.

Mulyani said the government's foreign aid receipts would also
increase its revenues when converted into rupiah at the lower
exchange rate.

Kwik believed the international community would be
particularly interested in the government's exchange rate the
government will use in calculating the budget.

It will automatically signal what the government believes is
the "equilibrium" level of the rupiah's value, he says.

The rupiah's value has plunged from Rp 2,400 to the dollar in
June to more than Rp 5,000.

None of the economists interviewed by the Post thought the
government would increase the salaries and wages of civil
servants and members of the Armed Forces.

The government most recently raised their salaries by an
average of 34.4 percent in May 1997, and had applied 10 percent
hikes in each of the three previous fiscal years.

Mulyani said some spending would have to be increased
nevertheless, such as servicing the government's debt and in
providing subsidies on the domestic sales of fuels.

But many analysts are also predicting the fuel subsidy may
have to be phased out in the coming fiscal year.

Mulyani predicted the crisis would eliminate the government
saving -- the difference between total domestic revenues and
routine spending -- which in the past exceeded Rp 20 trillion.

She said most of the spending cuts in the next budget would
have to come from the government's development spending (public
investment), set at Rp 38.92 trillion in 1997/1998, to reach
about Rp 27 trillion if it has to allocate a surplus equivalent
of 1 percent of GDP.

Kwik forecast that development spending may fall to as low as
Rp 21.73 trillion.